Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in operations, CNX is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding CNX's exposure to the risks of changing commodity prices, interest rates and foreign exchange rates.
CNX is exposed to market price risk in the normal course of selling natural gas and liquids. CNX uses fixed-price contracts, options and derivative commodity instruments (over-the-counter swaps) to minimize exposure to market price volatility in the sale of natural gas. Under our risk management policy, it is not our intent to engage in derivative activities for speculative purposes. Typically, CNX “sells” swaps under which it receives a fixed price from counterparties and pays a floating market price, but occasionally CNX may find it advantageous to purchase, rather than “sell”, financial swaps.
CNX has established risk management policies and procedures to strengthen the internal control environment of the marketing of commodities produced from its asset base. All of the derivative instruments without other risk assessment procedures are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility and cover underlying exposures. The Company's market risk strategy incorporates fundamental risk management tools to assess market price risk and establish a framework in which management can maintain a portfolio of transactions within predefined risk parameters.
CNX believes that the use of derivative instruments, along with our risk assessment procedures and internal controls, mitigates our exposure to material risks. The use of derivative instruments without other risk assessment procedures could materially affect the Company's results of operations depending on market prices; however, we believe that use of these instruments will not have a material adverse effect on our financial position or liquidity due to our risk assessment procedures and internal controls.
For a summary of accounting policies related to derivative instruments, see Note 1 – Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K.
CNX’s open gas derivative instruments can cause earnings volatility relative to changes in market prices until the derivative contracts are either settled or are monetized prior to settlement. At December 31, 2022 and December 31, 2021 our open derivative instruments were in a net liability position with fair values of $1,905 million and $976 million, respectively. A sensitivity analysis has been performed to determine the incremental effect on future earnings related to open derivative instruments at December 31, 2022 and 2021. A hypothetical 10 percent increase in future natural gas prices would have decreased the fair value by $816 million and $625 million at December 31, 2022 and 2021, respectively. A hypothetical 10 percent decrease in future natural gas prices would have increased the fair value by $679 million and $607 million at December 31, 2022 and 2021, respectively.
CNX's interest expense is sensitive to changes in the general level of interest rates in the United States. The Company uses derivative instruments to manage risk related to interest rates. These instruments change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. At December 31, 2022 and 2021, CNX had $2,055 million and $1,839 million, respectively, aggregate principal amount of debt outstanding under fixed-rate instruments, including unamortized debt issuance costs of $14 million and $17 million, respectively. At December 31, 2022 and 2021, CNX had $154 million and $377 million, respectively, of debt outstanding under variable-rate instruments. CNX’s primary exposure to market risk for changes in interest rates relates to CNX’s revolving credit facility, under which there were no borrowings at December 31, 2022 and $192 million at December 31, 2021, and CNXM's revolving credit facility, under which there were $154 million of borrowings at December 31, 2022 and $185 million at December 31, 2021. A hypothetical 100 basis-point increase in the average rate for CNX's variable-rate instruments would decrease pre-tax future earnings as of December 31, 2022 and 2021 by $2 million and $4 million, respectively, on an annualized basis.
All of CNX's transactions are denominated in U.S. dollars, and, as a result, it does not have material exposure to currency exchange-rate risks.
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Natural Gas Hedging Volumes
As of January 5, 2023, the Company's hedged volumes for the periods indicated are as follows:
For the Three Months Ended
March 31, June 30, September 30, December 31, Total Year
2023 Fixed Price Volumes
Hedged Bcf 103.9 113.0 114.6 114.7 429.7*
Weighted Average Hedge Price per Mcf $ 2.70 $ 2.42 $ 2.41 $ 2.47 $ 2.47
2024 Fixed Price Volumes
Hedged Bcf 97.5 98.1 99.2 99.2 381.3*
Weighted Average Hedge Price per Mcf $ 2.27 $ 2.43 $ 2.43 $ 2.43 $ 2.38
2025 Fixed Price Volumes
Hedged Bcf 91.7 92.8 93.8 94.9 373.2
Weighted Average Hedge Price per Mcf $ 2.38 $ 2.37 $ 2.37 $ 2.37 $ 2.37
2026 Fixed Price Volumes
Hedged Bcf 72.5 82.6 83.3 83.3 321.7
Weighted Average Hedge Price per Mcf $ 2.55 $ 2.63 $ 2.63 $ 2.62 $ 2.61
2027 Fixed Price Volumes
Hedged Bcf 34.6 35.0 35.4 35.4 140.4
Weighted Average Hedge Price per Mcf $ 3.29 $ 3.32 $ 3.32 $ 3.46 $ 3.35
*Quarterly volumes do not add to annual volumes inasmuch as a discrete condition in individual quarters, where basis hedge volumes exceed NYMEX hedge volumes, does not exist for the year taken as a whole.
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